COST CLASSIFICATION- MANUFACTURING COMPANY

BTS Company manufactures T-shirts and decorated them with custom designs for retail shop on
the workshop room. The costs incurred are listed below and for each cost, indicate which of the
following classifications best describes the cost. More than one classification may apply to the
same cost item.

Cost classifications:

a. Variable

b. Fixed

c. Period

d. Product

e. Administrative

f. Selling

g. Manufacturing

h. Research and Development

i. Direct material

j. Direct labor

k. Manufacturing Overhead

Cost items:

1. Cost of fabric used in T-shirts – A D G I

2. Wages of shirt makers- A D G J

3. Cost of new sign in front of retail T-shirt shop- B F C H

4. Wages of the employee who repairs the firm's sewing machines- B D G K

5. Cost of electricity used in the sewing department- A D G K

6. Wages of T-shirt designers and painters- A D G J

 7. Wages of sales personnel- B C F
8. Depreciation on sewing machines- B D G K
9. Rent on the building. Part of the building's first floor is used to make and paint T-shirts.
-K B D
Part of it is used for the retail sales shop. - F B C
The second floor is used for administrative officials and -E B C
storage of raw material and finished goods.- B D K
10. Cost of daily advertisement in local media- B C F
11. Wages of designers who experiment with new fabrics, paints and T-shirt designs- B C/D
HK
12. Cost of hiring a pilot to fly along the beach pulling a banner advertising the shop.- A/B C
F
13. Salary of the owner's secretary- B C E
14. Cost of repairing the gas furnace- B D K
15. Cost of insurance for the production employees- B D G K

COST CLASSIFICATION- HOTEL

The costs incurred by the Blue Hotel are listed below. For each cost, indicate which of the
following classifications best describe the cost. More than one classification may apply to the
same cost item.

Cost classifications:

a. Marginal cost

b. Opportunity cost

c. Sunk cost

d. Out of pocket cost

e. Direct cost of the food and beverage department

f. Indirect cost of the food and beverage department

g. Controllable by the kitchen manager

h. Uncontrollable by the kitchen manager

i. Controllable by the hotel general manager

j. Uncontrollable by the hotel general manager

Cost items:

1. The cost of the food used in the kitchen- E

2. The cost of general advertising by the hotel, which is allocated to the food and beverage
department- F

3. The cost of space (depreciation) occupied by a sauna next to the pool. J

The space could have been otherwise for magazine and bookshop. B

4. The discount on room rates given as a special order for a "Labor Day Gateway Special" -
I

5. The wages earned by table service personnel- I D

6. The salary of the kitchen manager- H D

7. The cost of leasing a computer used for reservations, payroll and general hotel
accounting. – B C

8. The wages of the hotel's maintenance employees, who spent 11 hours (at 20 pesos per
hour) repairing the dishwasher in the kitchen.- G D

9. The difference in the total cost incurred by the hotel when one additional guest is
registered.- A

10. The cost of space (depreciation) occupied by the kitchen.- H

11. The profit that would have been earned in a magazine and bookshop, if the hotel had
one.-B

12. The cost of the refrigerator purchased 13 months ago. The unit was covered by a
warranty for 12 months, during which it worked perfectly. It malfunctioned after 13 months,
despite an original estimate that it would last five years. -C

13. The cost of dishes broken by kitchen employees. -C

14. The cost of a pool service that cleans and maintains the hotel's swimming pool. -I D
COST CASE ANALYSIS

Noel Bernardo has been working a part-time job that pays 1,100 a month. His employer
has offered to convert the job into a full-time position at 1,500 a month. Take home pay is 70
percent of these amounts. In view of this offer, Francis (Noel?) is tempted not to return to school
for the coming year. His friend James is trying to convince him, to return to school. Noel
remarks, "I've been talking to other friends and no matter how you figure it, school is extremely
expensive. Tuition is about 2,200 per year. Books and supplies are another 300. Room and board
will cost 3,700 a year even if I share a room. It costs 2,400 a year to keep up my car and clothing,
and other incidental amount to 3,000 per year. I figure school will cost me the total of all these
costs, which is 11,600 plus my lost salary of 18,000 per year. At 29,600 a year, who can justify
higher education?"

If you were James, how would you respond to Noel's remarks? Justify your case showing
cost computation if he would choose schooling.

Answer:

If we are James, we will disagree to Noel and encourage him to return to school. The
things that he mentioned and considering like the accommodation, clothing, car, and other
incidentals are not that important because we can say that these things cost the same whether
or not Noel goes to school. To reduce the cost of school, Noel can look for part-time work,
scholarship or other financial assistance. If we will compute, the relevant costs for this
decision are the differential costs.

Opportunity cost or lost wages (take home)

(P1,500 x 70% x 12 months).... P12,600
Tuition................................................ 2,200
Books and supplies............................ 300
Total differential costs................. P15,100

Noel should recognize the difference of the present value of the differential after-tax cash
inflows with the present value of differential costs of getting the education including the
opportunity costs of lost income. Moreover, James can also add that better opportunities could
come in the future if returns to school and finish his education.

COST DETERMINATION
Chocolate Dough is a cookie company in Marikina City that produces and sells chocolate
chop cookies with extremely high quality and service. The owner would like to identify the
various costs incurred during the year in order to plan and control the costs in the business.
Chocolate Dough costs are the ff:

 Utilities for the bakery 2,100

 Paper used in the packaging product 90
 Salaries and wages in the bakery 19,500
 Cookie ingredients 35,000
  Bakery labor and fringe benefits 1,300
 Administrative costs 1,000
 Bakery Equipment Maintenance 800
 Depreciation of bakery plant and equipment 2,000
 Uniforms 400
 Insurance for the bakery 900
 Rent for administration offices 17,200
 Advertising 1,900
 Boxes, bags and caps used in the bakery 1,100
 Office Manager's salary 13,000
 Bakery overtime premiums 2,600
 Bakery idle time 500

Requirements:

1. What is the total amount of product costs?

2. What is the total amount of period costs?

Answer:

Utilities for the bakery 2,100

Paper used in packaging product 90
Salaries and wages in the bakery 19,500
Cookie ingredients 35,000
Bakery labor and fringe benefits 1,300
Bakery equipment maintenance 800
Depreciation of bakery plant and equipment 2,000
Uniforms 400
Insurance for the bakery 900
Boxes, bags, and cups used in the bakery 1,100
Bakery overtime premiums 2,600
Bakery idle time 500
Total product costs in pesos 66,290

Administrative costs 1,000

Rent for administration offices 17,200
Advertising 1,900
Office manager’s salary 13,000
Total period costs in pesos 33,100